Fundies worried about peak iron ore
Iron ore prices have jumped since late last year, when positive late-stage COVID-19 vaccine trials encouraged investors to consider a global economy emerging from the depths of the pandemic.
The iron ore surge before Friday was prompted by a recovery in demand for steel, not only from China, but from around the world, Curtayne said. Global steel production rose 23.3% in April from the same month a year ago, as factories recovered from COVID-19-related shutdowns in 2020, according to the World Steel Association.
“China has obviously had a hot economy, but the world is opening up and cannot get enough,” Curtayne said. “Construction is picking up globally and this is supporting the demand for steel and the demand for iron ore.”
It is difficult for the Chinese to really lower the price of iron ore because they cannot source it elsewhere.
– William Curtayne, Milford Asset Management
But rising commodity prices are raising fears of inflation in tax-boosted economies. Besides iron ore, copper, wood, canola and palladium all hit record levels this year.
Markets rallied after U.S. consumer staples prices rose at the fastest monthly pace in nearly 40 years in April. And Chinese producer prices rose at the fastest rate in more than three years in April, according to data released late last week.
Chinese government leaders have suggested taking action to tackle high prices for commodities, including iron ore. The government has drafted a five-year plan to reduce China’s dependence on imported iron ore by investing in new mines and seeking supplies from Russia, Myanmar, Kazakhstan and Mongolia.
Australia now accounts for 60% of China’s iron ore imports, followed by Brazil and India, and there is skepticism about China’s effectiveness in lowering the price of iron ore imports from Australia, at least in the short term.
“China is obviously a little concerned that commodity prices are high in all areas, including iron ore,” Curtayne said. “They are doing what they can for the lower jaw. But it is difficult for the Chinese to really lower the price of iron ore because they cannot source it elsewhere. “
The price of iron ore is a central facet of a strained relationship between Australia and China. Other Australian exports, such as wine, barley and coal, have suffered from Chinese tariffs over the past year.
But “China can’t do anything about iron ore,” said Jason Teh, chief investment officer at Vertium Asset Management. “It is impossible to find a replacement … if you produce steel, you will need Australian iron ore.”
Rather than focusing on whether China can source elsewhere, the fund manager examines the global supply and demand situation with respect to the short-term iron ore price path. .
The “trillion dollar question is whether we have reached peak prices,” he said. “Are we at the peak of steel demand and is supply about to catch up?” If this happens, you will see iron ore prices drop. “
Another factor to watch is the tightening of financing conditions in China, Curtayne said.
The latest correction comes in a market where positioning is seen to be relatively broad, he said, and price corrections do not necessarily lead to sharp, sustained price declines.
China has started to tighten the availability of finance, he said. “It can have a moderating effect on prices as the year progresses, which could play out to some extent now.”
Yet even if iron ore peaked, the price will likely continue to provide substantial tailwind for iron ore miners, he said.
“We think this will continue next year. By favorable we mean more than US $ 100 per tonne. We don’t expect more than US $ 200 a tonne in the long run. “